Draghi’s jawbone is wishbone for Asian markets

The Draghi jawbone sent Asian markets flying today with many bourses in the region up around 2% or more.

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2015-10-23T04:51:09+0100

Source: Bloomberg

Mario Draghi’s speech was as dovish as it could be without actually further easing monetary policy, with a pledge to 're-examine' the 'degree of monetary accommodation' at the December meeting. Mr Draghi noted that European economic growth and inflation had been impacted by negative developments in emerging market economies, which could further weigh on global growth and demand for euro area exports. This now leaves markets expecting the European Central Bank (ECB) to extend the asset purchasing program (APP) at its December 3 meeting. But Mr Draghi also noted the ECB’s awareness of the positive effects of negative interest rates seen by the Swiss National Bank and Scandinavian central banks. This raises the possibility that the ECB could cut deposit rates further from its current -0.2% levels. This prospect was clearly given significant weight as the EONIA six-month futures moved from 19 basis points before the meeting to 24.4 basis points after the meeting.

With such dovish commentary from the ECB, speculation now turns to the Bank of Japan’s (BoJ) 30 October meeting next week. It should be noted that the BoJ has given no hint of an easing bias in any of its recent statements or speeches, and finance minister Taro Aso came out last Friday stating that the BoJ is unlikely to ease. However, given Japan’s recent run of poor data it is quite likely to enter a technical recession in Q3. At the BoJ’s meeting this time last year the economy had similarly entered a technical recession and chose that meeting to expand its Quantitative and Qualitative Easing (QQE) program. Clearly the moves we have been seeing in the Nikkei and the Japanese yen are giving further BoJ easing a viable chance next week.

The Nikkei is up 3.6% over the past three sessions since Japan’s poor September trade sparked easing speculation, while the USD/JPY has risen by 1.1% over the same timeframe. The Nikkei had an excellent session, opening up about 2.2% at its highest level since 1 September and within touching distance of the 19,000 mark. Japan’s manufacturing PMI came in noticeably above estimates for 50.5 at 52.5, but even that didn’t seem to dint easing speculation too much.

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Going into the slew of central bank meetings next week, one of the most interesting currency pairs in Asia is the NZD/JPY cross. The Reserve Bank of New Zealand’s (RBNZ) meeting will be held at 7.00am AEDT on 29 October, only two hours after the US Federal Reserve announce the outcome of its central bank meeting. The RBNZ has eased at its past three meetings, but it looks set to keep rates on hold next week, with only four out of 18 economists surveyed calling for a rate cut.

The dairy price has bounced back, despite a minor retracement at this week’s auction. New Zealand business confidence has rebounded along with the dairy price. Given economic data has firmed considerably in recent weeks, and the RBNZ is still greatly concerned by the inflated Auckland housing market, the RBNZ is quite likely to leave rates on hold. This provides a prime opportunity for central bank policy divergence next week if the RBNZ does leave rates on hold and the BoJ eases. Indeed, the NZD/JPY rallied 2.5% overnight on exactly this speculation.

Chinese markets were somewhat indecisive about whether they wanted to join in the Asia-wide ebullience, whipsawing between positive and negative territory early in the session. The market was clearly uncertain as to whether the bounce in house prices diminished the chance of further rate cuts by Chinese authorities. China’s National Bureau of Statistics (NBS) released its property prices for September showing property prices continuing to come back steadily. When one digs into the NBS property data, its clear they are using some large moving averages and smoothing effects on the numbers.

Nonetheless, it seems fairly clear that China’s significant monetary policy easing and the removal of a range of restrictions on property purchases is continuing to steadily stimulate the market. The big question is when the steady increases in property prices begin to feed through into an uptick into property investment, which is still in the doldrums as China continues to work through its heavy property inventory overhang.

ASX

The ASX was buoyed along with the rest of Asia on the back of the ECB meeting. Ahead of the open the ASX was looking to open up roughly 1.7%, but it served to surpass even those lofty expectations by rallying over 2% at certain points of the day, and looks set to see its strongest close since 20 August.

Alongside the favourable macroeconomic environment, the ASX was also boosted by a flurry of M&A activity. Speculation that big name private equity funds were eyeing taking Big W off Woolworths' hands.

Beach Energy sought a merger with Drillsearch, offering a 27% premium to Drilsearch’s closing price. There are a lot of potential synergies between the two businesses. Should the deal go through, it would create Australia’s largest onshore oil producer as well as giving it strategic power in the East Coast gas market. And the deal puts into play smaller explorers Cooper Energy and Strike Energy, which could also offer potential accretive benefits for a buyer.

This saw the energy sector as a whole have a fairly strong session despite the poor performance in the spot oil market overnight, with the sector rising 1.5%.

ResMed reported its Q1 FY2016 financial results with a 3% drop in net income from the same period last year. This was mainly driven by the 9% decrease in revenues from EMEA and APAC since the same period last year. Despite that, it managed to trade fairly flat on the day, up 0.1%.

The healthcare sector was the worst performer on the market today, only gaining 0.5% compared to a 2% or more expansion by most sectors. This was mostly driven by the continued selloff in healthcare stocks in the US overnight. Valeant suffered another bout of selling over allegations it had been colluding with pharmacies to boost sales numbers.

NAB chose to follow CBA’s lead yesterday on increasing its home loan rates. This only leaves ANZ left to raise rates, giving the Reserve Bank of Australia considerable room to lower rates over the coming months. While market pricing has given more weight to a November rate cut, December or February are deemed far more likely. In any case, the markets were clearly supporting the moves by the banks as the whole sector rose 1.7%.

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